We have all read about the “new economy” and its impact on our lives. It seems quite likely that modern data processing and data communications technologies are producing profound changes with continuing powerful impact. But how “new” are these changes and how exactly will they change our world?
In some respects, this is a new version of an old story. Past “new economies,” or past “economic revolutions,” have also seen extraordinary growth in technology, the rise to dominance of new industrial sectors, and the transformation of society. hundred years from 1750 to 1850, the core of the (technological) industrial revolution itself, saw British textile output multiply thirtyfold; in the middle of the 18th century it took hand-spinning workers 500 hours to spin a pound of cotton, but by the early 19th century it took machine spinning workers only three hours to perform the same task — a rate of technological progress of ten percent per year sustained beyond half a century. The 50 years after the introduction of electrical power, 1880 to 1930, saw a hundredfold increase in the mechanical horsepower applied to U.S. industry and an enormous increase in the flexibility of factory organization — a rate of technological progress of more than nine percent per year.
These earlier transformations revolutionized their economies’ leading industries and created “new economies.” They changed the canonical* sources of value and the process of production. The industrial revolution itself triggered sustained increases in median standards of living for the first time. How people worked and, consequently, how people lived were more radically changed by the industrial revolution than by any previous economic shift, with the exception of the invention of agriculture and the discovery of fire.
The economic transformations of the second industrial revolution driven by electrification and other late 19th century technologies were almost as far reaching: mass production, the large industrial enterprise, the continent-wide and then worldwide market in staple manufactured goods, the industrial labor union, the social insurance state, even more rapid sustained increases in median living standards, and the emergence of middleclass society.
But consider another extraordinary wave of innovation that did not create a “new economy.” A well-known American economist has analyzed the real price of light how much it costs in the way of resources and labor to produce a fixed amount of artificial illumination — and has found that the real price of light has fallen by a thousand fold during the past two centuries. A middle-class urban American household in 1800 would have spent perhaps four percent of its income on illumination: candles, lamps, oil and matches. A middleclass urban American household today spends less than one percent of its income on illumination, and consumes more than a hundred times as much artificial illumination as did is predecessor of two centuries ago.
Yet, we do not speak of the “illumination revolution,” or of the “new economy” generated by the existence of exterior streetlights and interior fluorescent office and store lights. The productivity of illumination producing technology has increased enormously, but its impact on the economy and on society has been limited. The demand for light has not grown rapidly enough to offset falling prices.
If the demand for high-tech products increases more than one percent when the price falls one percent, then the rapid fall in the price of the leading sector’s product will increase the share of the leading sector in the economy. This growth in the dynamic leading sector is, in fact, what happened in the 1980s and 1990s. Why did this happen? The greater the number of different uses found for high-tech products as their prices decline, the greater will be the tendency of the demand to increase. Thus, the stronger will be the forces pushing the share up as technological advance continues. The history of the electronic sector suggests that the demand for high-tech products is sensitive to their prices. Each successive generation of falling prices appears to produce new uses for computers and communications equipment at an astonishing rate.
The essence of the present “new economy” is quickly stated. Compare our use of information technology today with our predecessors’ use of information technology half a century ago. The decade of the 1950s saw electronic computers largely replace mechanical and electromechanical calculators as the world’s automated calculating devices. By the end of the 1950s, there were roughly 2,000 installed computers in the world: machines such as Remington Rand UNIVACs, or IBM 702s. The processing power of these machines averaged perhaps 10,000 machine instructions per second. Today, there are 300 million active computers in the world with processing power averaging several hundred million instructions per second. Therefore, there has been a roughly four-billion-fold increase in the world’s raw automated computational power in 40 years, an average annual rate of growth of more than 50 percent per year.
There is every reason to believe that this pace of productivity growth in the leading sectors will continue for decades. More than a generation ago, Intel Corporation cofounder, Gordon Moore, noticed what has become Moore’s Law — that improvements in semiconductor fabrication allow manufacturers to double the density of transistors on a chip every 18 months. The scale of investment needed to make Moore’s Law hold has grown exponentially along with the density of transistors and circuits, but Moore’s Law has continued to hold, and engineers see no immediate barriers that will bring the process of improvement to a halt anytime soon.
These characteristics of technological growth have crucial implications for business and for the functioning of the economy as a whole. The “new economy” of today is distinctive in that initial costs of research and development — for instance, designing semiconductor chips and building a factory — are very high. However, once the production has started, additional costs necessary for producing increased amount of the products are very small. Consequently, rising demand will often produce higher efficiency for computer manufacturers and lower prices, leading to yet higher demand, whereas in the old economy, additional costs necessary for producing increased amount of products (automobiles, for instance) are comparatively much larger, and rising demand leads to higher prices, which leads producers, when prices rise, to produce more and consumers to buy less.
As increasing computer power has enabled their use in real-time control, the domain has expanded further as lead users have figured out new applications. Production and distribution processes have been and are being transformed. The economic domain of computers has expanded from primary production, such as the use of robotics in auto assembly, to distribution sectors, such as scanner-checkout at supermarkets and online shopping.
As the economic domain has grown, it has branched along two quite different paths. First, computers have burrowed inside conventional products as they have become embedded systems, as seen in digital alarm clocks, cell-phones, or self-controlling air-conditioners. Second, computers have connected outside to create what we call the World Wide Web: a distributed global database of information all accessible through the single global network. Paralleling the revolution in data processing capacity has been a similar revolution in data communications capacity. There is no sign that the domain of potential uses has been exhausted.
We are moving towards an information oriented economy in which the canonical source of value is information or knowledge itself, such as a gene sequence, a line of computer code, or a brand image. In such a world, goods are increasingly valued not for their physical mass or other physical properties but for weightless ideas. Thus, unless Moore’s Law ceases to hold or the usefulness of computers and communications equipment for new purposes rapidly declines, the data processing and data communications sectors will not shrink but grow, and continue to change our lives.
*canonical : authorized, orthodox
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